Is Tether the new Bitcoin bubble?

Just like the bubble period in 2017, the price of Bitcoin has been rising recently. As of last Wednesday morning, the price of Bitcoin once again exceeded $18,000. This is also the second highest price in history for Bitcoin since December 2017 (when the price exceeded $20,000 per unit).

But everyone should remember that the cryptocurrency market plummeted in 2018 and retail investors lost everything. This time, we hope to once again unveil the mystery of Bitcoin's latest price trend.

There are indeed many factors that make sense at present, including Tether and PayPal's support for Bitcoin, and China's strong crackdown on over-the-counter transactions. But before discussing the details, let's reiterate the factors that determine the price of Bitcoin, or the basic source of its value.

Bitcoin miners are participants who protect the Bitcoin network by "mining" the next transaction block on the blockchain. They need to sell their newly created Bitcoins in exchange for real money to pay for the high electricity bills they pay for mining.

Every day, the total amount of cashed out in the Bitcoin ecosystem is about $8 million to $10 million. Therefore, in order to ensure that most miners can make a profit, Bitcoin naturally needs to adjust its pricing accordingly. If the price does not match the input, a considerable number of miners will immediately choose to withdraw, causing the entire Bitcoin network to face huge risks. It is precisely because of the overall satisfaction of miners that the total market value of Bitcoin has reached $345 billion.

Now let’s go back to May 11, a very important day for Bitcoin. The Bitcoin “halving” will be officially triggered, which means that the reward for mining new blocks will be cut in half. According to the plan, the Bitcoin network will halve its mining revenue every four years.

Before May 11, miners around the world were able to collect 1,800 bitcoins per day as rewards, with each bitcoin exchanged for $5,000. But after the halving, the network will only generate 900 new bitcoins per day, and miners will sell these precious cryptocurrencies for at least $10,000.

But trouble always comes unexpectedly. From February to March this year, the world was plagued by the first wave of the epidemic crisis, and the price of Bitcoin shrank by half to around $5,000 - barely enough to cover the mining energy costs after the halving. Miners began to struggle. How should they continue to operate? Who will guarantee their normal profits? At that time, companies represented by Tether (which issued a stablecoin of the same name pegged to the US dollar) began to emerge rapidly, and its currency issuance also reached its highest point since its establishment 5 years ago.

Tether is arguably the main source of liquidity for non-bank cryptocurrency exchanges, which command a huge share of bitcoin trading. There is currently about $18 billion worth of Tether in circulation in the cryptocurrency market, and few can really say what is backing its value.

Due to Tether’s lack of transparency, its failure to provide long-promised audit results, and the New York Attorney General’s ongoing fraud investigation into Tether along with cryptocurrency exchange Bitfinex, the more reliable speculation is that its value is fictitious. Many people directly suspect that Tether is a scam.

(Tether was originally promised as an IOU, with one Tether representing a certain amount of redeemable U.S. dollars. But after that, the British Virgin Islands-registered company began issuing Tethers in large quantities, and no one seems to have actually redeemed the corresponding U.S. dollars. The only exception was in October 2018, when Tether recovered $850 million from its payment processor Crypto Capital and destroyed the corresponding 500 million Tethers.)

According to data released by Nomics, at the beginning of 2020, the total value of Tether coins in circulation was only $4.3 billion. This figure remained stable in the first three months of this year. But starting on March 18, just five days after the price of Bitcoin fell below $5,000, Tether's delivery machine started to start in full swing.

Bitcoin price and USD stablecoin supply.

In March, Tether issued $1.9 billion worth of Tether, and in April, it issued an additional $1.5 billion worth of Tether. This can be regarded as the cryptocurrency's own economic stimulus plan. As a result, during this year's halving event, the price of Bitcoin soared to $10,000. However, Tether's shipments continued, causing the price of Bitcoin to soar and providing holders with a good opportunity to cash out.

In May, June and July this year, Tether issued Tether coins worth a total of $6 billion. In August, when the price of Bitcoin reached a high of $12,000, Tether issued another $2.5 billion. When Bitcoin fell to $10,000 in September, Tether injected another $2 billion. Despite this, Bitcoin was no longer able to return to the $12,000 price level and began to hover in the $10,000 range for a long time.

Then in October this year, after U.S. prosecutors charged the founder of BitMEX, a Seychelles-registered, Hong Kong-based bitcoin derivatives exchange, with violating reserve commitments and anti-money laundering obligations, the price of bitcoin began to rise again. What on earth is going on?

Tether is experiencing a surge

There is a theory that the ever-increasing amount of Tether is being used to buy Bitcoin. And strong market demand will always push up prices - even if the source of all this is just a kind of "fake money" with no real value.

And unlike in 2017, it will take a much stronger force to push up the price of Bitcoin. (By the end of 2017, before the Bitcoin bubble burst, the total value of Tether in circulation was only $1.3 billion, far lower than the current level.) Nicholas Weaver, a Bitcoin skeptic and researcher at the International Computer Institute at the University of Berkeley, is convinced that this wave of Bitcoin price fluctuations is absolutely man-made.

He said, “The current issuance of Tether can fully explain this wave of price increases, because it far exceeds the total amount of all new Bitcoin purchased. If everything happens naturally, then the outstanding amount of non-fraudulent stablecoins should at least increase significantly.”

In other words, if Tether really had a dollar peg to it, the market demand for regulated stablecoins should be consistent with Tether. But this is not the case. Currently, only Circle's USDC has seen significant growth, and the growth rate is far from comparable to Tether. Moreover, USDC's growth is mainly due to the rapid expansion of the decentralized finance (DeFi) market.

Horge Stolfi, a professor of computer science at Brazil's State University of Campinas, wrote a letter to the U.S. Securities and Exchange Commission (SEC) in 2016, highlighting the risks of issuing a Bitcoin ETF.

He mentioned that "as long as Bitcoin can still be purchased with fake money, the price of Bitcoin can be raised to any level in exchange for the continued participation of miners." He also mentioned in a Twitter post that the higher the price of Bitcoin, the faster the flow of real money out of the system - because miners will be more willing to exchange all new Bitcoins for cash. Multiply the current price of Bitcoin of $18,600 by 900, and you will realize that the average daily trading volume is nearly $17 million. He said that investors will never get this money back.

Klyith from 4Chan predecessor Something Awful explained Tether’s trick this way: “A bunch of elves come along and start flooding the paper money market with fairy-tale gold, driving the price up to staggering heights. But when any participant tries to use the gold to buy something or pay taxes in another town, it instantly turns to worthless stone.”

"The worst thing is that the elves can tell at a glance which are real gold and which are artificially made counterfeit coins, and the hard-working farmers will be the ones who get hurt in the end. And if no action is taken, all the real gold in the town will be looted by them. If it were you, what would you do?"

Of course, in addition to Tether, which has caused a stir, people have also linked two other events to this round of Bitcoin price surge. The media has obviously paid more attention to these two stories.

PayPal supports Bitcoin payments

As one of the world's largest companies, PayPal is actively promoting cryptocurrencies and giving Bitcoin investors a sense of security. After all, if Bitcoin is really a pure Ponzi scheme, why would such a prestigious and respected company be willing to accept it? In addition, MicroStrategy, Square, Fidelity Investments, and Mexico's third richest man Ricardo Salinas Pliego have all expressed their willingness to accept Bitcoin payments on the Internet.

On October 21, PayPal announced a new service that allows users to buy and sell cryptocurrencies with cash. On November 12, the service was officially opened to US customers, who can now buy and sell Bitcoin, Bitcoin Cash, Ethereum, and Litecoin through their PayPal wallets.

If you are a PayPal user and have completed the necessary identity verification, there is no need to go through any additional trouble - from now on, you are a qualified cryptocurrency trader.

Of course, PayPal wallets are not as flexible as exchanges. You can’t transfer cryptocurrencies as easily as you can on exchanges. But at least you can use cryptocurrencies to pay 26 million merchants on PayPal—the only difference is that they still receive cash in the end. In addition, related transactions require high fees, such as 2.3% for items under $100. From this perspective, users are actually betting against PayPal that the price of Bitcoin will continue to rise.

Stolfi described PayPal's actions on Twitter as a "meta casino where people are betting big on some special internal chip that contains the value of a random variable."

Another broader view is that PayPal is forcing people into a trap who don’t quite understand how cryptocurrencies actually work, or who don’t quite understand Tether and the risks it poses to cryptocurrencies. If government authorities decide to arrest Tether’s operators and freeze its assets (similar to what happened to Liberty Reserve in 2013), it could cause the price of Bitcoin to plummet.

Maybe some friends still think that Tether has little impact on the price of Bitcoin. Here we might as well recall the testimony made by Tether/Bitfinex CFO Giancarlo Devasini to the New York Attorney General in 2019, "I want to emphasize that all this is extremely dangerous for the entire cryptocurrency community. Once Tether no longer exists, the price of Bitcoin is likely to fall below $1,000."

PayPal's transaction volume this month has reached 85% of the transaction volume of Binance.US, the US branch of Binance, the world's major cryptocurrency exchange. Although Binance.US's absolute transaction volume itself is not large, it has already shown a new market development direction.

Some people believe that PayPal's entry into the cryptocurrency market means that Bitcoin has been "sentenced to death." Tether and exchanges that support Tether are working hard to increase the price of Bitcoin, hoping to attract as much cash as possible into the existing system during the transaction process.

Paypal’s move represents a death sentence for cryptocurrencies. Instead of sending instructions to exchanges and Tether, people can simply “buy Bitcoin” directly on PayPal. The whole process has been greatly simplified.

Because of this, before PayPal truly takes control of everything, all parties must have another pre-death carnival and take advantage of people's anxiety to reap another wave of profits.

— Trolly McTrollface (@Tr0llyTr0llFace) November 18, 2020

China cracks down on over-the-counter trading

According to relevant news, the threshold for Bitcoin miners from China to sell Bitcoin on over-the-counter trading platforms is constantly increasing.

Since China banned cryptocurrency exchanges three years ago, OTC exchanges (where buyers and sellers can trade directly) have become a convenient way for Chinese people to participate in cryptocurrency trading. Many Bitcoin miners from China naturally choose this method to sell their Bitcoin assets.

Recently, Chinese authorities have begun cracking down on OTC trading in an effort to combat internet gambling and curb capital outflows. If authorities determine that your trading partner is intent on money laundering, your bank account could be immediately frozen. As a result, miners have to take more precautions to minimize cashing out as much as possible.

Some speculate that this will make it difficult for Bitcoin miners to sell their Bitcoins and lead to a liquidity crisis. In other words, buyers will be able to obtain fewer Bitcoins, which will in turn drive up market demand.

But ICSI's Weaver warned that any rational explanation for the current price of Bitcoin is in vain. He stressed, "The market has gone crazy. Don't try to reason with a madman."

He also stressed that in a purely rational world, if other markets are both efficient and honest, then closing OTC trading platforms will not have any impact on the price of Bitcoin. He said that such OTC trading platforms actually represent the payment ability of miners, and Chinese miners hope to use this to exchange Bitcoin for cash and then convert it overseas to evade capital controls. He also added that it is foreseeable that if China continues to crack down on OTC trading platforms, the amount of Bitcoin circulating in OTC channels will also decrease and continue to push up the price of Bitcoin. The only way out is for miners to switch to relatively formal bank-type exchanges. But he asked in return, "This also makes no sense. How many bank-type exchanges are left now?"

And at this very moment, Tether is still alive, well and prosperous.